What Happens When National Debt Exceeds GDP?

The debt-to-GDP ratio is the proportion of a country’s total debt to its total GDP (GDP).
The debt-to-GDP ratio can also be thought of as the number of years it would take to repay debt if GDP were used as a measure of payback.
The greater the debt-to-GDP ratio, the less likely the country is to repay its debt and the greater the chance of default, which might generate financial panic in domestic and international markets.

What happens if the national debt rises too far?

It has expanded to that size as a result of government expenditure programs aimed at boosting the economy.

The debt ceiling is a restriction set by Congress on the amount of debt that can be owed. When this threshold is reached, the government must act immediately to raise or suspend the debt ceiling or reduce the debt.
If the national debt rises too high, government expenditure on programs like Social Security may be reduced, or you may be forced to pay more taxes.
The national debt has an impact on the economy because if it grows too large, consumer and company confidence in the economy may erode, resulting in financial market turbulence and increased interest rates.

Is national debt a factor in GDP?

According to the Institute for International Finance, global debt reached about $300 trillion in 2021, accounting for 356 percent of global GDP. The global debt-to-GDP ratio has risen by 30 percentage points in the last five years, indicating an extremely high debt level. It’s no surprise that analysts are increasingly concerned about the negative repercussions of high debt levels.

Unfortunately, few economists grasp why excessive debt is a bad thing, let alone how much debt is excessive. It’s difficult to know what to be concerned about and why. Because economists assume that a country’s debt burden is measured by its national debt-to-GDP ratio, they frequently fail to distinguish between different types of debt, treating a rise in one country’s debt-to-GDP ratio as equivalent to a rise in another country’s ratio, despite the fact that the two cases may have very different consequences.

So, when and why is debt a drag on the economy? Importantly, different types of accumulating debt can have quite different economic consequences. Furthermore, even in countries that are considered to have excessive debt, adjustment costs might differ greatly.

Dispelling a Myth About Modern Monetary Theory

Before discussing the many repercussions of debt, it is necessary to briefly explore some of the recent confusion that has resulted from a naive understanding of modern monetary theory (MMT). Many proponents of the theory argue that MMT teaches that a government that is financially sovereign (that issues its own credible fiat currency) has no spending limits, and that such a government can spend a limitless amount without fear of consequences until inflation rises.

This is absolutely not the case. What MMT truly demonstrates is that a government that is financially sovereign has no direct spending limits. It can always manufacture money or borrow money to meet its spending needs without first obtaining the funds. This isn’t to say that there aren’t any indirect constraints. Economic restrictions are always present. This is because an economy cannot consume and invest more than it produces and imports, and any ex ante imbalance must be rectified by implicit or explicit transfers that diminish the purchasing power of some sector of the economy by a sufficient amount to bring the two back into balance.

How Demand Adjusts to Supply

Even if it isn’t usually fully understood, this is a straightforward concept. Government spending, whether financed with money or debt, boosts the purchasing power of some sectors of the economy, hence generating demand. There is no real constraint on government spending if it simultaneously raises supply by an equal amounteither directly (by funding infrastructure investment, for example) or indirectly (by funding increases in consumption that lead corporate investment to rise).

However, any government spending that increases demand without also boosting supply by the same amount produces an ex ante supply and demand imbalance that must be rectified by implicit or explicit transfers. These transfers must lower the purchasing power of one or more sectors of the economy to the point where the ex ante demand-supply gap is zero. The power to produce believable money at will does not change the fact that demand and supply must always balance.

Furthermore, contrary to what many MMT proponents appear to believe, taxes and inflation are not the only options for bridging the demand-supply imbalance. There are numerous similar mechanisms, including the ones listed below.

Inflation depreciates fixed incomes and financial assets, reducing demand by restricting consumption and investment through income and wealth consequences.
Wealth and property taxes mostly shift the adjustment cost to the wealthy due to wealth effects, implying that taxes must be quite high to meaningfully reduce demand.
Tariffs shift the cost of adjustment to importers, which includes all home consumers, and they operate by causing domestic savings to rise. This is accomplished by lowering the actual value of household income, and thus spending, in relation to total output.
In a similar approach to tariffs, currency depreciation shifts the adjustment cost mostly to domestic importers.
Trade deficits push down domestic savings in nations where investment is not restrained by a scarcity of savings (including all advanced economies), putting the adjustment cost onto workers.
A consumer goods shortage, such as the one that happened in the former Soviet Union, might push the expense onto regular people by compelling them to make unintentional saves.
Financial repression, which generally takes the shape of distorted deposit rates, acts in a similar way to inflation, but it primarily affects middle- and working-class savers. This is especially true in economies where the banking system is tightly regulated and where investment options are limited.
By lowering purchase prices, countries that centralize the purchasing of domestically produced agricultural goods can shift the adjustment cost onto farmers. In countries like the Soviet Union and China, where the agricultural sector was obliged to subsidize fast industrialisation, this has happened frequently.
Any monopoly buyer or seller of goods and services regulated by the government essentially performs the same thing. A monopoly energy supplier, for example, can redistribute income between energy producers and consumers by raising or lowering energy prices.
Higher unemployment shifts the expense of adjustment on those who lose their jobs. This is frequently part of a bigger adjustment process that results in domestic enterprises cutting back on production (through widening trade deficits, for instance).
Wage repression also effectively shifts the expense of adjustment to workers. This is especially true in a highly globalized economy when government spending is matched by a rise in the trade deficit, or if firms aim to keep wages low to boost international competitiveness. It can also happen when governments utilize their control over labor unions and wage talks to force employees to support rapid industrialization (this strategy was used in Romania to fund the repayment of external debt, among other things, under general secretary Nicolae Ceauescu).
Reduced profits transfer adjustment costs onto enterprises, perhaps resulting in fewer investment.
The expense of adjustment is shifted to the impacted sector when government spending on the military, the social safety net, and other public goods declines.

The point is that there are a variety of approaches of resolving ex ante demand-supply imbalances caused by government spending, and all of them entail the same fundamental process: some mechanism, whether intentional or not, distributes the adjustment cost to some sector of the economy. This is crucial to comprehending some of the ways in which excessive debt can destabilize an economy.

When Is Debt a Problem?

There are at least four main repercussions of mounting debt that can have a negative impact on an economy’s current and future performance. Transfers, financial distress, bezzle (or fictitious riches), and additional spillover adjustment costs known as hysteresis are among them.

Transfers: When, as described above, rising government debt produces an ex ante discrepancy between total demand and total supply in an economy, an automatic adjustment mechanism must be in place to restore equilibrium by transferring revenue from one sector of the economy to another. Although this is not always the case, this transfer mechanism has the potential to distort the economy in ways that directly stifle growth. This appears to be the main, and possibly only, adjustment mechanism acknowledged by naive MMT proponents.
Financial distress: Increasing government debt has the potential to stifle economic progress. When there is enough uncertainty about how real debt-servicing costs will be assigned through the explicit or implicit transfers outlined above, the debt might induce diverse sectors of the economy to adjust their behavior in order to avoid having to absorb the debt’s true cost. These changes in behavior either stifle growth, exacerbate financial instability, or both. Furthermore, this conduct is frequently self-reinforcing.
Bezzle: As I highlighted in this August 2021 Carnegie paper, rapid debt expansion can lead to the systematic manufacture of fictional growth and bezzle in some circumstances. The production of this fictitious wealth, which distorts economic activity, can take the form of inflated asset values or the capitalization of expenditures that should be expensed instead. However, bezzle is only ephemeral, and it is always amortized, even if its creation can last for years.
Finally, once adjustments are made, mounting debt can cause hysteresis, in which the equilibrating adjustment mechanism generates more future adjustment costs. The most obvious example is when mounting government debt causes a financial crisis, which in turn causes either debt-driven deflation or a political crisis. When asked why too much debt is an issue, most economists will argue that debt only becomes a problem when it leads to a financial catastrophe. This argument is incorrect for a variety of reasons, in addition to being completely circular. A crisis is just one of the ways an economy might move from overly high debt levels, and it isn’t even the most expensive method.

Debt becomes an issue when it triggers one or more of these four reactions, slowing economic growth. Each of these mechanisms works in a unique way, and while the last one is fairly self-explanatory, it’s worth delving more into the other three.

Rising Debt Can Distort the Economy Directly by Creating Suboptimal Transfers

It’s crucial to remember that rising debt isn’t an issue if it causes the supply of goods and services to rise in tandem with the demand it generates. When this happens, the debt essentially self-liquidates, with debt accumulating at a rate no higher than the economy’s genuine debt-servicing capacity (for which GDP is usually a proxy). This isn’t to say that mounting debt isn’t a factor in such situations. It may help some sectors of the economy at the expense of others to the extent that it creates income distribution shifts, but this is an issue of income distribution, not debt.

When debt grows faster than the country’s actual debt-servicing capacity, the problem becomes more serious. This occurs when debt increases demand for goods and services without creating an equal increase in output of goods and services, either directly or indirectly. This can occur due to a multitude of factors. Rising government debt, for example, in an economy with insufficient labor and capacity, could fund additional consumption (through welfare payments, for example), defense spending, or nonproductive infrastructure investment (a particular problem in China); rising debt could also encourage speculative spikes in property, stock market, and other asset prices as demand is boosted by the wealth effect.

Rising debt raises ex ante demand for goods and services relative to ex ante supply in these instances. However, because demand must always equal supply, a mechanism to equilibrate the two is required (some of which I list above). If and when the implicit or explicit transfers connected with the adjustment directly hinder growth, the first of the three difficulties with mounting debt arises.

Debt is commonly thought to consist of resource transfers from the future to the present, although this isn’t the case. Borrowing, on the other hand, entails a present transfer of funds from the lender to the borrower, followed by a future transfer that completes the loan. This future transfer is typically expected to reverse the initial transactionas resources are transferred from the borrower to the lenderbut this only happens when debt-induced increases in demand are met by increases in supply. In other scenarios, depending on a variety of factors, transfers to or from other sectors of the economy, such as those indicated above, may wind up absorbing the debt’s cost.

Excessive debt becomes a concern when these transfers have a negative impact on the economy. If the transfers take the form of excessive inflation or financial repression, for example, they might increase business uncertainty and distort economic activity. They can weaken what economist John Meynard Keynes dubbed “animal spirits” and restrict investment in riskier but productive sectors of the economy if they take the form of higher taxes. Alternatively, if they result in trade deficits, they can exacerbate unemployment, household debt, and other issues.

Rising Debt Can Distort the Economy Indirectly by Setting Off Financial Distress Costs

The extent to which these implicit or explicit transfers hinder growth indirectly is a similar, and far more serious, potential problem. Economic actors aren’t illiterate or unable to learn. As the amount of uncertainty about how real debt-servicing costs will be apportioned grows, so does the amount of uncertainty about which sector will be required to absorb the cost and how, therefore economic agents are likely to change their behavior to protect themselves.

Historical precedents demonstrate the diverse methods in which different sectors of the economy do this. As debt levels rise, the gap between ex ante demand and supply widens. Economic agents recognize that this gap will be filled through a variety of means, including inflation, higher taxes, higher unemployment, wage suppression, financial repression, capital controls, and currency depreciation, among others. As a result, households, particularly the wealthy, shift their wealth into movable assets or foreign currency (capital flight), consumers cut back on spending, home buyers and equipment buyers postpone purchases, manufacturers relocate operations abroad, farmers hoard production or reduce land development, and workers, if allowed, unionize and become more militant, or work less efficiently. Foreign enterprises, in particular, are likely to react to uncertainty over debt repayment by liquidating assets and fleeing outside in countries where foreigners are considered as acceptable political targets.

These activities, in turn, can have a variety of knock-on effects. All of these behaviors support similar behavior in other economic sectors, as business owners disinvest or limit their investment time horizons, real estate developers cut back on development initiatives, and factories postpone expansion plans. These behavioral adjustments can lower the value of existing infrastructure and manufacturing facilities by reducing economic activity, making it more difficult for local governments and enterprises to service the debt. Furthermore, creditors will raise lending costs and shorten maturities; suppliers who are paid in IOUs will raise prices, demand cash payments, or refuse to deliver; and policymakers will likely shorten policy time horizons in order to solve short-term problems as quickly as possible, even if these policies are not optimal in the medium and long term. Governments may respond by decreasing spending if any of these behaviors by consumers, enterprises, foreigners, and policymakers have an impact on government revenues.

To the degree that rising debt necessitates some type of adjustment in which certain economic sectors lose purchasing power to balance demand and supply, each sector realizes the risk and adjusts its behavior to avoid being obliged to bear the cost. As financial instability spreads across the economy, these behavioral shifts lead growth to halt, aggravating the adjustment costs that weak economic agents must bear.

The most recent manifestation of this process has been Beijing’s crackdown on China’s overleveraged property industry. Until last year, no one bothered about how debt payments were distributed because everyone expected the property sector’s problems would be settled through implicit government assurances.

When the market realized that debts were no longer guaranteed, everyone in the real estate industrydevelopers, contractors, suppliers, creditors, homebuyers, and local governmentsworried about how the costs of insolvency would be distributed implicitly or explicitly, so everyone changed their behavior to protect themselves. Lenders withheld credit, suppliers suspended supplies, contractors halted construction projects, homeowners postponed purchases, and so on. As a result, the property sector’s troubles grew worse, spreading to other, less-leveraged developers, as well as upstream suppliers and downstream clients.

Only credible debt guaranteeswhich do not address debt problems but essentially shift them to the guarantorcan prevent things from spiraling out of control once this happens. In China, the previous several months have demonstrated how debt-related instability can permeate across the economy.

Finance experts will notice that much of this sounds a lot like corporate-finance arguments regarding the conduct of stakeholders in a corporation with a high risk of default. In reality, what I’ve just described is the macroeconomic equivalent of something that’s well-known in the world of corporate finance. Governments differ from businesses in that they do not face the same level of default risk as businesses, but their debt-servicing capacity is still limited by the production of goods and services in the real economy, and as uncertainty over the allocation of their debt-servicing costs grows, it has a similar impact on stakeholders.

Unfortunately, whereas this behavior is well-documented and understood in corporate finance, economists appear to be less familiar with its macroeconomic counterpart, despite numerous historical parallels. The automatic spread of financial distress and debt deflation was notably virulent in the early 1930s in the United States, as it was in low-income nations like Brazil and Mexico during the debt crisis of the 1980s, Japan in the 1990s, and so on.

In both the business and macroeconomic contexts, financial crisis behaviors lead growth to slow, uncertainty to rise, and balance sheets to become more brittle, with the latter two consequences causing growth to slow even more. This behavior is particularly damaging because it is so self-reinforcing: rising debt levels create increasing uncertainty about how the associated costs will be allocated, which triggers financial distress behavior that stifles growth, widening the gap between debt-servicing needs and debt-servicing capacity, and driving even more financial distress behavior.

Debt Can Create Bezzle

The third economic issue linked to increased debt is that it can encourage and tolerate an increase in counterfeit wealth or bezzle. This is frequently the most harmful effect of mounting debt, because illusory wealth causes economic behavior to be distorted both when it is generated and, more significantly, when it is destroyed. When this artificial wealth is eventually depleted, the process might happen rapidly, as in a financial crisis, or slowly, as in wasted decades of stagnation and poor growth.

Although the link between mounting debt and the production of artificial wealth isn’t always causal, they are frequently both symptomatic of the same set of underlying monetary imbalances.

For starters, rising debt is linked to skyrocketing stock, real estate, and other asset prices, which are far higher than their projected contribution to the production of goods and services. As Berkshire Hathaway vice chairman Charlie Munger said, when this happens, the perception of riches might outweigh the actuality of wealth. The common denominator between this type of fictitious wealth and debt is most likely a rapid expansion in underlying liquidity, which feeds into speculative asset purchases as prices diverge from fundamental expectations. This can be caused by direct money creation, an increase in asset liquidity, or advances in financial technology.

Second, rising debt in some economies can be the result of formal or informal pressure on banks to lend into nonproductive investment that isn’t written down for many years due to tight budget restrictions. (Notable examples include China in recent years, Japan in the 1980s when investment was subject to window advice, and the Soviet Union and Brazil in the 1970s when investment was subject to window guidance.) When this happens, expenditures that should be expensed are instead capitalized, resulting in understated income-statement expenses and exaggerated balance-sheet assets, fraudulently inflating net income and wealth above what they would have been if only productive activity was documented.

Both types of artificial wealth creation have an impact on economic activity, but they do it in different ways. When excessive liquidity pushes rising asset prices, the main impact on the economy is indirect, as a result of the wealth effect. Higher asset values make asset-owning people feel wealthier, so they may spend more and save less out of current income than they would otherwise. Higher asset prices raise the value of assets that may be used to secure debt, making borrowing to fund spending easier (and cheaper).

In the second case, nonproductive expenditure has a direct impact on economic activity due to the income effect. Money spent on nonproductive investment increases income and economic activity in the same way that money spent on productive investment does, with the exception that in the latter case, the increase in income and economic activity is justified by a real increase in the future value of goods and services produced by the economy, whereas it is not in the former.

Amortizing Bezzle

Both types of fictional wealth creation raise domestic demand and economic activity (typically while debt levels are rising), but these artificial increases in demand and economic activity must be reversed eventually, and usually considerably more sharply. This occurs when the conditions that create false wealth are eventually reversed, such as when debt levels stabilize or begin to fall. At that point, consumers and businesses feel worse collectively than before, and as the value of collateral falls, households and firms face growing pressure to pay down debt. 1

The influence of nonproductive investment on economic activity is substantially stronger when banks are under pressure, resulting in large quantities of nonproductive investment and rising debt ratios. Economic activity is directly boosted by investment spending as it is made, and this activity overstates the real value created for the economy. It’s as if workers, contractors, and suppliers were paid $100 to build a house and then another $100 to demolish it, however instead of recording the combined $200 as waste or a cost increase, they record it as a $200 increase in the value of their assets. Even though no real money has been created, the economic agents engaged would collectively record a $200 increase in their wealth. This rise of wealth is typically represented on a bank’s balance sheet by loans against which $200 of income-earning assets are held.2

More crucially, while this activity can last for years, it instantly starts to stifle future growth by contributing less to future economic activity than its value suggests. Similarly, just as the production of fictional wealth increases spending (and consequently growth) through wealth effects, the amortization of fictitious wealth reduces expenditure and growth. In many circumstances, this downward pressure on growth may drive monetary authorities to expand the domestic money supply even more quickly, ensuring that the net creation of fictional wealth (new bezzle minus the growing amortization of old bezzle) maintains economic activity growing at the same rate. In such instances, bezzle creation must pick up to keep economic activity from slowing. Furthermore, the GDP growth rate is further lowered because the resulting (lower) amount of growth is assessed against a higher base GDP level.

The Effect of Nonproductive Investment on the Lending Banks

Some economists and commentators claim that countries with large amounts of nonproductive expenditure, such as China, do not incur major adjustment costs since both the borrowers and the banks are owned and controlled by the government. They claim that local governments can simply wipe off the debt.

This Kramer type of study demonstrates how little most analysts grasp debt’s repercussions. Consider a bank with $10 in capital and $90 in deposits that makes a $100 loan to a project that only generates $50 in economic value in the end. Regardless of whether the poor loan is wiped off or not, the bank must still find the funds to service the deposits. To argue that the investment project generates just $50 in economic value is to suggest that it generates only $50 in resources to serve the bank’s deposits.

A banking system can address the disparity between the earning capacity of its assets and the obligations on its liabilities in a variety of ways. The bank can go into default on its depositors and force them to accept the loss right now. Alternatively, bank authorities may adopt some sort of financial repression to force down the deposit interest rate, fearful of the political ramifications of a bank failure. This is effectively a hidden tax on savings because the loss is recognized over a long period of time. This is what Chinese regulators did in the 2000s to clean up the pre-IPO banks, which coincided with a steep reduction in the household proportion of GDP, owing in part to this hidden tax. Finally, authorities have the option of recapitalizing the bank at the expense of taxpayers or monetary asset holders.

Regardless of the mechanism used by the banking system, depositors must either bear a loss up front, or over a longer period of time, or some other sector of the economy must absorb the loss. Writing off bad debt isn’t a magical process that magically erases losses. It’s merely the act of formally allocating a previously unrecognized loss.

Duck Soup Economics

A thought experiment is one approach to understand how the bezzle associated with capitalized, nonproductive investment may ultimately hinder future growth. Assume that two countries, Fredonia and Sylvania, are economically equal in every manner except that Sylvania, unlike Fredonia, begins to invest consistently in underutilized resources that have no impact on enhancing the future value of commodities and services. Assume that in Sylvania, this nonproductive investment is capitalized as an asset rather than expensed.

One effect will be that Sylvania’s GDP and wealth will increase faster than Fredonia’s for a period of time. Bridges to nowhere enhance economic activity in Sylvania in ways that show up in GDP growth data, and this increase is matched by an increase in the reported value of assets and loans held by local companies and banks, even if they do not provide economic value. Sylvania’s GDP growth and wealth accumulation would continue to outpace Fredonia’s until Sylvania’s debt levels became too high to sustainusually because soaring debt levels persuade or force Sylvanian officials to cut back on nonproductive investment.

When this occurs, the tides begin to shift. Whereas the two countries’ GDPs and measures of collective wealth differed in Sylvania’s favor for a time, these measurements should now converge over time. In terms of the real worth of products and services produced, the two countries are, after all, equal.

However, for them to converge, Sylvania’s nominal GDP growth must slow in the future, both in comparison to Fredonia’s and in comparison to what it would have been if past growth had not been artificially inflated. If the two economies create the same real value of goods and services, then any period in which one economy’s GDP growth outpaces the other (due to causes mostly related to poor accounting) must be followed by a period in which the distortions are reversed. This is the only way their reported GDP can converge to reflect their real-world economic equality.

However, while the two economies should converge in theory as the bezzle created by nonproductive investment is wrung out of the system, extra costs are likely to drop the value of Sylvania’s actual economy to below that of Fredonia’s in practice. These are the incremental or frictional expenses incurred as a result of Sylvania’s many years of nonproductive economic activity. Because the creation of bezzle boosts Sylvania’s GDP growth and wealth, and then the amortization of this bezzle lowers it, this tendency will have influenced business and household behavior in ways that will leave the country poorer than if it had never created bezzle. This does not even take into account the probable financial hardship caused by Sylvania’s increased debt.

This is only a technique of emphasizing something that should be self-evident. Anything that artificially inflates reported growth for a period of time in comparison to an impartial proxy for real economic value must eventually result in reduced reported growth as reported growth converges withor, more likely, declines belowthat of the proxy.

Mapping the Impact of Excessive Debt onto the United States and China

Because the United States and C

Is the US debt higher than the country’s GDP?

From 1940 to 2020, government debt to GDP in the United States averaged 63.64 percent of GDP, with a peak of 128.10 percent of GDP in 2020 and a low of 31.80 percent of GDP in 1981.

What happens if the national debt remains unpaid?

The government will be unable to borrow extra funds to meet its obligations, including interest payments to bondholders, unless Congress suspends or raises the debt ceiling. That would very certainly result in a default.

Investors who own U.S. debt, such as pension funds and banks, may go bankrupt. Hundreds of millions of Americans and hundreds of businesses that rely on government assistance might be harmed. The value of the dollar may plummet, and the US economy would almost certainly slip back into recession.

And that’s only the beginning. The dollar’s unique status as the world’s primary “unit of account,” implying that it is widely used in global finance and trade, could be jeopardized. Americans would be unable to sustain their current standard of living without this position.

A US default would trigger a chain of events, including a sinking dollar and rising inflation, that, in my opinion, would lead to the dollar’s demise as a global unit of account.

All of this would make it far more difficult for the United States to afford all of the goods it buys from other countries, lowering Americans’ living standards.

What is the impact of the national debt?

Everyone is affected by the national debt. Because more tax money will have to be paid out as interest on the national debt, the amount of tax revenue available to spend on other governmental services will be reduced.

How much debt is excessive?

The debt-to-income ratio is the percentage of your monthly debt commitments compared to your total monthly income (before taxes). The debt-to-income ratio should be less than or equal to 36%. A debt-to-income ratio of more than 43 percent is deemed excessive.

Is the national debt important?

President Hebert Hoover used to say, “Blessed are the children, for they shall inherit the national debt,” in the 1930s. He must be rolling over in his grave today, pitying our children as they discover that our national debt has surpassed $30 trillion for the first time in history. Our national debt is currently bigger than it was at the conclusion of WWII when measured against the size of the economy.

While Hoover may have been concerned about a high national debt, most politicians and academic economists today do not appear to be that concerned.

Our politicians and academics are unconcerned by historic peacetime budget deficits and unprecedented debt levels, having drunk from the well of Modern Monetary Theory and thinking that interest rates will remain low indefinitely. High levels of national debt are irrelevant to them. It’s all the more astonishing given that, as Harvard’s Kenneth Rogoff and Carmen Reinhart have pointed out, history is riddled with far too many examples of countries experiencing catastrophic economic crises as a result of unsustainable public debt levels.

A big public debt burdens the government with large future interest payment commitments, which is a major issue. This leaves little room for additional government spending, making it harder for the government to reduce the budget deficit. Failure to rein down the deficit, on the other hand, risks keeping the national debt on an upward trajectory. In that backdrop, the nonpartisan Congressional Budget Office predicts that the country’s public debt to GDP ratio will nearly quadruple from around 100 percent now to 200 percent by 2050 if current trends continue.

The Federal Reserve’s ability to control inflation is severely harmed by a large level of public debt. It makes it harder for the Fed to raise interest rates because of the threat of increasing the government’s interest payment burden. With inflation running at its fastest rate in forty years and the Fed needing to hike interest rates significantly from its current zero level if it intends to put the inflation genie back in the bottle, such a concern seems more pertinent today.

A large public debt level makes the country economically insecure, especially in times of severe inflation. This is due to the fact that we have become the world’s greatest debtor country. We’ve been relying on strangers’ charity in general, and the kindness of the Chinese and Japanese in particular, to support our budget excesses for years.

If foreigners begin to believe that we are inflating our debt away, they will be hesitant to hold it and will demand higher interest rates to compensate them for the risk of inflation. This might force the dollar to plummet, adding to inflationary pressures and fueling suspicions about our desire to inflate our way out of debt.

Foreigners have begun to distrust our political willingness to honor our public debt commitments without resorting to inflation as a result of the lack of any real constituency for disciplined budget practices in recent years. First, in 2017, at a period of strong domestic economic growth, the Trump administration approved a massive unfunded corporate tax reduction that increased our national debt significantly. The Biden administration then implemented a $1.9 trillion budget stimulus in March 2021, against the recommendation of most economists, contributing to our highest peacetime budget deficit on record.

If we don’t want to follow the well-trodden route of countries debasing their currencies to inflate away their debts, we’ll have to take the passage of the $30 trillion threshold for our public debt more seriously than today’s politicians and scholars appear to be doing. More importantly, we must forge a bipartisan agreement on reasonable fiscal policy.

Is it possible for the United States to ever be debt-free?

Congress has tried numerous times to reduce the national debt, but it has not been successful in reducing the debt’s increase. The federal government’s outstanding debt is known as the US debt.

When was the last time the country’s debt was reduced?

According to Edelberg, the amount was cut each year from 1998 to 2001. The public’s share of the federal debt was around $3.3 trillion in the second quarter of 2001, down from $3.5 trillion the previous year. The US economy was thriving during these years, reducing the government’s borrowing needs.

The White House, according to David Primo, a political science and business administration professor at the University of Rochester, believes the age of budgetary prudence will continue.

Primo pointed out that, at the end of President Bill Clinton’s second term, his government released a press release proclaiming that the United States “is on track to eradicate its public debt within the next decade.”

In fact, the last time the United States was able to totally pay off its national debt was in 1835, which was about 186 years ago.

The national debt has been steadily rising since the early 2000s. The debt has risen as a result of a succession of events and decisions, according to Edelberg and Primo, including tax cuts, the US wars in Iraq and Afghanistan, and the 20072009 financial crisis.

According to Primo, the government debt and deficit began to gain more attention in the early to mid-2010s, following the financial crisis, but subsequently faded.

To reduce the national debt, Edelberg says we’ll have to raise taxes or cut expenditure, both of which are “painful.”

“There’s nothing particularly urgent about reducing the magnitude of the total amount of debt outstanding,” Edelberg added, despite the trillion-dollar numbers.

She stated that, for starters, even if the overall nominal amount of debt remained constant, the burden on the economy would be reduced each year.

“We’re a country that grows in a predictable manner year after year, and we’re a safe haven for people from all over the world who want to invest in the United States.” “Having a stock of debt out there at any one time makes perfect sense,” Edelberg said. “In fact, our financial system is structured in such a way that having a large stock of Treasury securities to trade is essential.”

Part of the reason for this is that investors regard government debt as a low-risk option to get a reasonable return.

Experts suggest that considering the national debt in terms of its ratio to the country’s gross domestic product is a better approach to look about it.

What’s concerning, according to Edelberg, is that the total amount of debt is expected to grow in proportion to the broader economy. Both she and Primo agreed that the situation should be resolved.

When the debt-to-GDP ratio rises too high, Primo claims, it stifles economic progress by diverting too much money from private investment and consumption to government operations. He went on to say that if creditors get concerned about the debt’s growing magnitude, it may become more difficult for the US to borrow money.

Correction (Dec. 2, 2021): An previous version of this piece misidentified the years when the government debt and deficit began to garner more attention.